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On January 5, 2000, Phoenix Research and Trading, a Toronto-based hedge fund management group, issued a hastily prepared press release. The firm stated that one of its traders, Stephen Duthie, had lost $7.4 million in unauthorized trading in its publicly traded Phoenix Hedge Fund LP, with the losses originating from a feeder fund called the Phoenix Fixed Income Arbitrage Limited Partnership.

Several days later, the firm clarified its earlier statement: The loss suffered by the fixed-income fund was actually $125 million. The firm's principals, moreover, were proposing the dissolution of the partnership and hiring Ernst & Young to undertake a "forensic investigation.” The firm added that it was hiring a private investigator to locate Duthie, who was feared to have fled the country.

How could a $150 million market-neutral arbitrage fund—a fund designed to take low-risk bets—lose $125 million? Phoenix claims the losses were wholly the result of a rogue trader who violated the firm's investment guidelines. Since the news surfaced, however, the firm has refused to talk publicly about the scandal and has made the results of the Ernst & Young investigation available only to those who signed a strict nondisclosure statement. Duthie, on the other hand, claims that the fund collapsed because a large carry trade went sour—one in a series of such positions he claims Phoenix carried on several occasions during his five-year career at the firm.

It's a classic "He said, she said” story that initially received a flurry of coverage in the Canadian financial press. The Ontario Securities Commission has since launched an investigation, but the mystery remains unresolved almost five months later.

Fund in trouble

According to Duthie's account, Phoenix was a small hedge fund group of 13 people with $250 million under management at its peak. By design, the Fixed Income...

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